State of the Economy and Prospects
- After a significant slowdown in GDP growth rate in the second half of 2008-09 and despite decline in agricultural output, in 2009-10 the economy is expected to grow at 7.2 percent in as compared to 6.7 percent in 2008-09, with the industrial and the service sectors growing at 8.2 and 8.7 percent respectively.
- Per Capita income grew by 5.3 percent 2009-10.
- GDP growth is expected to be at around 8.5 percent (+/- 0.25 percent) in 2010-11 with a full recovery, and in excess of 9 percent in 201 1-12.
- For the fiscal year from March to December 2009, Wholesale Price Index inflation is estimated at 8 percent however inflation in food products is significantly higher at 19.8 percent.
Micro-foundations of inclusive Growth
- Tendulkar Expert Group Report estimates India’s aggregate poverty to be 37.2 percent with. 41.8 percent of the rural population and 25.7 percent of the urban population being poor. Special initiatives are needed to combat poverty for a rapidly growing India, – Main challenge being direct the money already allocated to eradicate poverty.
- Plan and Non plan expenditure rose to 19.46 percent in 2009-10.
- Unique Identification System (UID) to be rolled out by 2012 to create a database to establish their identity anywhere in the country by providing basic demographic as well as biometric details.
- One of the biggest challenges is high double digit food inflation – weekly food price inflation on a year on year calculation reached to a maximum of 19.95 percent for the week ending 5 December 2009.
- To increase revenue from reforms in the Income-tax administration various measures recommended are: (i) remove the strategic underfiling incentive, with beneficial compliance effects (consideration should be given to removing the ward / circle distinction, replacing it with random assignment rules). (ii) Penalty and prosecution efforts with a word of caution that corrupt officials should not be encouraged to misuse the system. (iii) Encouraging efforts to improve the quality of information available to assessing officers. (iv) Include measures of penalty effort in the assessing officers’ performance evaluation.
- Administrative delays by government departments, caused by the hierarchical organizational structure of decision making in government, results in delays in implementing infrastructure projects and the cost overruns. Necessary to speed up stages of project approvals, awarding of contracts and implementation.
Fiscal Developments and Public Finance
- With growth in nominal GDP at only 10.6 percent, fiscal deficit was as a proportion of GDP was higher. The higher estimated levels of fiscal deficit in 2009-10 are largely due to the fuller impact of the tax cuts announced as a part of the fiscal stimulus packages in the second half of fiscal 2008-09.
- The gross Tax-GDP ratio is expected to decline to 10.4 percent in 2009-10 (direct tax being 6 per cent and indirect tax being 4.4 percent) from 12.9 percent in 2008-09 (direct tax being 6.9 percent and indirect tax being 6 percent).
- In 2009-10, Fiscal, Revenue and Primary deficits placed at 6.5 percent, 4.6 percent and 2.8 percent of GDP respectively.
- Direct taxes grew by 14.3 percent with personal Income-tax rising by 20.8 percent and corporate Income- tax by 10.8 percent.
- Indirect taxes declined marginally by 3.4 percent with revenue from Excise Duties declining by 11.9 percent and Customs Duties by 4.1 percent. However, revenue from Service tax has increased by 18.6 percent.
- External debt is as a percent of GDP is on the rise and is placed at 4.5 percent in 2009-10.
Prices and Monetary Management
- The first half of the FY 2008-09 was marked by high wholesale price index (‘WPI’) based inflation, primarily due to the rise in global commodity and fuel prices. The subsequent global economic meltdown starting September 2008, reversed the trend and due to the decline in commodity prices globally, WPI inflation slipped into negative territory during June to August 2009. However upswing in food inflation continued during 2009-10 due to unfavourable south west monsoon.
- Average food inflation increased to 19.77 percent in fiscal 2009-10, from 7.56 percent during fiscal 2008-09.
- Anti-inflationary measures undertaken include procurement of rice and wheat and to maintain stocks in such quantities to allow market interventions to control prices.
- To overcome liquidity constraints RBI had followed an accommodative monetary policy during 2009-10. The slew of measures introduced after September 2008 to enhance the liquidity in the system included a series of downward revisions in policy rates covering repo rate, reverse repo rate, CRR and SLR.
- Key challenges include addressing inflationary expectations and to ensure that the growth in money supply and credit to productive sectors, so that growth prospects in the near to medium term are sustained.
Financial Intermediation and Markets
- Overall credit demand of the manufacturing sector from the banking sector slowed down during the FY 2009-10, however, Corporates could access non-bank domestic sources of funds and external financing at lower costs.
- During FY 2009-10, Public Sector Banks (‘PSB’) were observed to be faring better in terms of growth in credit extended as compared to the deceleration in private banks and decline in business of foreign banks.
- Domestic deposit rates also softened during the period.
- Working group constituted by the RBI has recommended replacing the existing benchmark prime lending rate (‘BPLR’) systems with the base rate system. Banks will not need to lend below the base rate as it would represent the bare minimum rate below which it would not be viable for them to lend.
- Scheduled Commercial Banks (‘SCB’) remained robust, however, were not insulated from the slowdown in the economy in 2008-09. The SCB business expanded by 21.2 per cent as in March 2009 as compared to 25 percent in the previous year. PSB maintained their growth momentum. Private sector and foreign banks registered a deceleration in growth.
- The overall CRR of all SCBs improved to 13.2 percent by end of March 2009 from 13 percent a year earlier, thus remaining significantly above the stipulated minimum of 9 percent.
- Indian banks recovered a higher amount from NPAs during 2008-09 as compared to the previous year, pointing towards efforts to improve asset quality of banks.
- Capital and commodity markets gained strength and increased risk appetite of investors led to sharp rise in international capital flows to emerging markets during India.
- Many policy initiatives relating to the Capital market taken during the year covering all segments viz, Primary and Secondary Markets, Corporate Bonds, Derivatives, FIIs and Mutual Funds over and above Regulatory Developments.
- Several new commodities were introduced for futures trading in 2009 and total value of trades in commodity future market rose from INR 50.34 Lakhs crore in 2008 to INR 70.90 lakh crore during 2009.
- Number of participants in the Insurance sector has gone upto 44 during the year.
- Key challenges include interdependence between corporate and mutual funds, governance of financial intermediaries and awareness of investors; Pension Fund Regulatory Development Authority faces the challenge of expanding the distribution network.
- External Sector
- Net capital flows at USD 29.6 billion in April–September 2009 remained higher as compared to USD 12 billion in April-September 2008. Net inward FDI remained buoyant at USD 21 billion for April–September 2009 reflecting the continuing liberalisation and better growth performance of the economy.
- Exports and Imports showed substantial decline during the April– September 2009. However there has been improvement in the balance of payments situation during April–September 2009 resulting in higher net capital inflows and lower trade deficit.
- Current Account Deficit increased to USD 18.60 billion in April– September 2009, despite a lower trade deficit, mainly due to lower net invisible surplus.
- The Trade Deficit was lower at USD 58.20 billion during April-September 2009 as compared to USD 64.4 billion in April-September of 2008 mainly on account of decline in oil imports.
- During fiscal 2009-10 foreign exchange reserve increased by USD 283.50 billion at the end of December 2009 from USD 252 billion at the end of March 2009.
- In fiscal 2009-10 the rupee has strengthened against the USD on the back of significant turnaround in FII inflows, continued inflows under FDI and NRI deposits, better macro economic performance of the Indian economy and weakening of the USD in the international market.
International Trade
- The World Bank has forecast real GDP growth rate of 7.5 percent for India for 2010 as against global growth rate of 2.7 percent.
- During first half of 2009-10 the gross inflow of short term trade credit to India stood at USD 21.7 billion, declined by 9.2 percent due to the difficult financing conditions prevailing in the international credit markets and increased risk aversion by the lending counterparties.
- Indications of emergence out of crisis lie in export growth in 2008- 09 standing at respectable 13.6 percent. However Merchandise Exports posted a decline of 27 percent in April–September 2009.
- During 2009-10 (April–December) as a result of global recession, export growth was negative both in dollar and rupee terms.
- During 2009-10 (April–December) import growth was negative at 23.6 percent.
- During 2009-10 (April–December) the trade deficit fell by 28.2 percent to USD 76.2 billion (as per customs data) in 2009-10 from USD 106 billion in the corresponding period of the previous year.
- Key challenges include liberalising FDI in services (like health insurance, rural banking and higher education), fine tuning trade strategies, harmonizing tariff rates, rationalising indirect tax structure, streamlining many domestic regulations which can help in growth and export of services, focus on services in multilateral and bilateral negotiations, etc.
Agriculture
- In 2008-09, Agriculture (including allied activities) accounted for 15.7 percent of the GDP and contributed 10.2 percent of national exports.
- Agricultural growth declined to 1.4 percent due to sharp fluctuations and vagaries of nature.
- In Commodity Futures Market, during 2009-10 (upto December 2009), the value of trade in agricultural commodities was about 16.33 percent. Agricultural commodities accounted for 38 percent of total volume of trade, the Gross Capital Formation in Agriculture and Allied Sectors relating to GDP in this sector has shown an improvement from 14.07 percent in 2004-05 to 21.31 percent in 2008-09.
Industry
- Industrial sector has emerged as one of the prime movers in the revival of Gross Domestic Product Growth (GDP) in second quarter of the current year. The overall industrial growth revived to the level of 7.7 percent during April to November 2009.
- Major industrial groups like automobiles, rubber and plastic products, wool and silk textiles, wood products, chemicals and miscellaneous manufacturing staged a strong recovery during April to November 2009 while machinery and textiles products reinforced their growth. The growth in consumer durables has been broad based. On the other hand, low growth in food products, beverages and tobacco products and cloth and footwear acted as dampener on the growth in consumer non- durables.
- Food products experienced a decline in production of 7.2 percent in April – November 2009 with a major growth dampener in sugar production which declined by 59.6 percent.
- Indian Pharmaceutical industry has grown from a humble INR 1,500 crore turnover in 1980 to approximately INR 1,00,611 crore in 2009-10 and globally ranks third in terms of volume of production. Exports of pharmaceuticals have consistently outstripped imports.
- In 2009-10 the Indian steel industry appears to have successfully overcome the effects of global economic slowdown with a Indian steel consumption expected to be rising at 6-9 percent during the current year on higher demand from real estate, construction and automobile sectors.
- The Growth of machinery and equipment of 12.1 percent in 2009-10 (April- November) has been at the core in the growth of the capital goods, constituting around 65 percent of the total weight of the capital goods sector.
- The economic recession in leading export destinations adversely impacted the performance of Indian IT companies. There has been decline of 11.5 percent in the software and services exports in the first half of 2009-10.
- The Tourism sector witnessed a positive growth in 2009-10 (April- Dec) with Foreign Tourist arrivals and foreign exchange earnings registering growth of 1.1 percent and 10.9 percent respectively.
- The growth in bank financing of the industrial sector decelerated significantly during 2009-10 (April- Nov).The mobilization of financial resources from the domestic non-bank sector including the capital market has been significantly higher during the period compared to the corresponding period in 2008-09.
- The growth in credit to industry declined steeply from 37 percent in November 2008 to 14.2 percent in November 2009 on a year on year basis.
- The labour intensive sectors in India did not revive.
- Key challenges included measures in reviving / sustaining the high growth in labour -intensive sectors along with erasing the skill deficit with a multi-faceted programme, controlling the inflation, removing infrastructural impediments etc.
Energy, Infrastructure and Communications
- Infrastructure services that were affected by the slowdown in general economic activity during 2008-09 have gradually revived in the current fiscal with easing of supply bottlenecks in certain sectors and with demand recovery in others.
- The robust growth momentum in telecommunications, particularly the wireless segment, continues with monthly additions exceeding 17.6 million connections. Approximately 85 percent of the Eleventh Five Year Plan target of 600 million connections has already been achieved at the halfway point.
- In the midst of the worst-ever slowdown in the history of world civil aviation, even the modest levels of growth in India are indicative of resilience. Core industries like power, coal and other infrastructure like ports and roads are also reviving.
- The recent economic downturn reinforced the need of enhancing infrastructure investment, which in turn underscored the importance of Public Private Partnership (PPP) in effectively harnessing the required resources. The Government has been developing several enabling tools to promote PPPs which are vital to catalyze investments for building new infrastructure.
- Raising the capacity creation in some critical infrastructure sectors to the desired level is a major challenge and requires multifaceted initiatives. The need of the hour is to expedite, synergize and consolidate the efforts- legislative, administrative and executive to sufficiently and promptly meet the demands of increasing population and faster economic growth.
Human Development, Poverty and Public Programmes
- Under the United Nations Development Programme (UNDP) Statistical update 2009, the human development index for India is at 0.612 placing it at 134 out of 182 countries. The low rank is mainly due to lack of pace of the human development in line with progress made in GDP per capita and bridging the gap in health and education indicators of India.
- The Central Government outlay on social services has increased consistently from 19.9 percent in 2004-05 to 23.8 percent in 2009- 10 in areas such as Rural Development, Education, social security, labour welfare, etc.
- Substantial progress was made during this year by the Central Government through better facilities and quality of life to rural population, committed steps towards alleviation of urban poverty and initiatives like Public Private approach for the upliftment and development of the weaker sections.
- Government has launched a large number of programmes and schemes to bridge the gap in coverage and outreach of health related services at all levels.
- During 2009-10 (June 2009), unique steps like formation of Unique Identification Authority of India were
- initiated to bring efficiency to implement Government programmes, specifically in improving the delivery of the governments flagship schemes.
Before parting:-With the fiscal budget to be announced in the Parliament, the Indian Government feels that the optimism for positive growth is justified over medium to long term. Emphasis laid on improvements in urban and rural infrastructure along with reforms in governance and administration to push India onto the summit of world economy by 2014. The key challenge continues to be the level of fiscal deficit and identification of an appropriate exit strategy from the various stimulus packages awarded earlier.
